As an investor in real estate you understand how important it is to preserve your wealth and your assets. In the ever changing world of taxation we are fortunate to have IRC Section 1031. This tax code allows you to exchange from one investment property to another and defer taxes on the gain. Thus you continue to build wealth through real estate investment, and maintain your hard earned equity.
The benefits of tax deferral under IRC Section 1031 have been available since 1921. Over the years through IRS Letter Rulings, tax court procedure and the long awaited IRS Final Rules and Treasury Regulations, completing an exchange today is easier and safer than ever. The exchange continues to gain popularity as one of the last tax benefits available to investors in real estate. Section 1031 states:
| "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment." |
First Guaranty Exchange through its affiliation with First American Title is pleased to provide unequaled safety, expertise and service for you when completing a 1031 Tax Deferred Exchange. As a Qualified Intermediary we prepare the documentation and instructions needed, while overseeing the entire process. Additionally we provide the security of First American Corporation's $12 million Fidelity Bond for the protection of your exchange funds. Our goal at First Guaranty Exchange is to make the exchange process as simple as possible for all parties concerned, and to have you return as a repeat customer.
What does First Guaranty Exchange Do?
When you and your tax consultant have decided that a 1031 tax deferred exchange is best for you, First Guaranty Exchange will see to it that the transaction proceeds according to your plan. First Guaranty Exchange will prepare the exchange agreement, act as the qualified intermediary and provide you with forms and reminder letters to simplify the process. In a typical exchange, First Guaranty Exchange will acquire your real property (the "relinquished property") and sell it to the purchaser. Immediately, or within the maximum 180 days thereafter, First Guaranty Exchange will use the exchange proceeds to acquire new "Like Kind" property (the "replacement property"), selected by you in accordance with the exchange regulations. The replacement property will then be transferred to you to complete the exchange.
Timing is Everything
The crucial elements of a 1031 tax deferred exchange are very much "in the timing." It is critical to have contacted and set up an exchange with First Guaranty Exchange before you transfer title to the relinquished property. If the transfer of the relinquished property and the replacement property occur at the same time you are completing a simultaneous exchange. If there is even a one day delay between the relinquished and replacement property closing, it is considered a delayed exchange.
The Delayed Exchange
When completing a delayed exchange you must:
- Identify replacement property within 45 days after the transfer of the relinquished property.
- Acquire the replacement property within 180 days of the first closing.
- 180 days after the transfer of the relinquished property, or
- the tax filing date for the year in which the transfer of the relinquished property took place.
It is also critical that you do not receive the sale proceeds from the relinquished property. Pursuant to Section 1031 and the regulations, this cash may not be actually or constructively received by you. As part of our service, First Guaranty Exchange will hold and invest the cash proceeds in an interest bearing account, until the replacement property identified by you can be acquired by First Guaranty Exchange to complete your exchange transaction.
How is Replacement Property Identified?
Identification of replacement properties must be submitted in writing, signed by the taxpayer and delivered or sent before midnight of the 45th day. You may choose one of the following ways to identify your replacement property:
- Three Property Rule: Three properties no matter what their fair market value.
- 200 Percent Rule: Any number of properties as long as their combined fair market value does not exceed 200% of the fair market value of all relinquished properties.
- 95 Percent Rule: Any number of properties no matter what the aggregate fair market value, provided 95% of the value of the identified properties are acquired.
Like-Kind property refers to real property held for productive use in a trade or business or for investment. It does not refer to the nature, character or type of property, but addresses the intended use of the property. For example, you can exchange raw land for a retail center, an office building for an apartment building, a single family rental for an industrial building. The interpretation of Like-Kind offers great flexibility with respect to real property.
Items that are not considered Like-Kind in the tax code include (1) stock in trade or other property held primarily for sale (2) stocks, bonds or notes (3) other securities or evidence of indebtedness or interest (4) interest in a partnership (5) certificates of trust or beneficial interest, or choses in action. Additionally, foreign property is no longer considered Like-Kind.
What is "Boot"?
Boot is the term used to describe property that is not Like-Kind in an exchange. Cash, personal property, notes or reduction in mortgage (debt relief) are all examples of Boot and are subject to tax. To avoid potential Boot the exchanger must aquire property:
- Equal or greater in value
- Equal or greater in equity
- Equal or greater in debt
Can interest be earned on the sales proceeds?
Current IRC regulations provide that interest earned on the sales proceeds may be received at the conclusion of the exchange without jeopardizing the tax deferred status of the exchange. Our fee schedule at First Guaranty Exchange allows the exchanger to take advantage of these regulations by earning interest on the sale proceeds.
Can I cancel my exchange at any time?
The Treasury Regulations restrict the right of the exchanger to receive cash except under certain provisions outlined in the exchange agreement. The right to cancel the exchange at any time and receive cash upon request is construed as control of the cash and will disallow the exchange. The limits set in our exchange agreement outline the conditions set by the regulations. Please give us a call to review these conditions.
| Roseville Branch (877) 505-1031 1386 Leadhill Blvd. Roseville, CA 95661 FAX (916) 218-3780 |
San Jose Corporate Office (800) 833-4343 1737 North First Street, Ste. 460 San Jose, CA 95112 FAX (408) 451-7955 |
San Francisco Branch |